If you’ve ever been curious about investing in stocks or wondered how companies go from being privately held to publicly traded, then you’ve probably come across the term “IPO” or Initial Public Offering. While IPOs can seem complex with their jargon, we’re here to break down some key terms in a simple and relatable way, so you can understand what’s happening in the exciting world of stock markets.
Abridged Prospectus:
A brief document that companies must provide to potential investors alongside their IPO application. It contains essential information about the company for investors to consider.
Draft Red Herring Prospectus (DRHP):
A preliminary document submitted by a company before an IPO, outlining its mission, financial performance, and risks. Helps investors decide whether to invest.
Bid Lot:
The minimum number of shares investors must apply for in an IPO. Investors can bid for more shares in multiples of this lot.
Book Building:
A method to determine IPO prices based on investor demand. Prices can vary depending on demand; this is different from a fixed price IPO.
Floor Price:
The lowest price within the IPO price range. Applications below this price won’t be accepted.
Cut-off Price:
The price at which investors are allotted shares in an IPO, determined based on demand. It can be within the price range or higher.
Issue Price:
The final price at which shares are allocated to applicants, varying for different investor categories.
Listing Date:
The day when IPO shares become tradable on the stock exchange.
Non-Institutional Investor (NII):
A category of investors, including individuals, NRIs, companies, etc., who can invest more than Rs. 2 lakh in an IPO. They cannot bid at the cut-off price.
Retail Individual Investors:
This category includes individuals and HUFs who can invest up to Rs. 2 lakh in an IPO and can bid at the cut-off price. They have a dedicated share of 35% in the IPO.
Qualified Institutional Buyers (QIB):
Institutional investors like mutual funds and foreign portfolio investors. They cannot cancel their bids and typically receive 50% of IPO shares.
Anchor Investor:
A subset of QIBs who can apply for Rs. 10 crore or more worth of shares in an IPO, usually allotted 60% of the QIB portion.
Oversubscribed and Undersubscribed:
If more applications are received than shares offered, it’s oversubscribed. If fewer applications are received, it’s undersubscribed.
Application Supported by Blocked Amount (ASBA):
A process where investors’ money is temporarily blocked in their accounts during the IPO application period. The required amount is deducted after allotment, making the process more efficient.
Price Band:
The range of prices within which investors can bid for IPO shares, set by the company and underwriters for different investor categories.
Offer Date:
The first day when investors can apply for IPO shares, also known as the IPO’s opening date.
Lot Size:
The minimum number of shares you can bid for in an IPO, typically in multiples of the lot size.
Minimum Subscription:
The minimum percentage of IPO shares that retail investors must subscribe to for the IPO to proceed, usually set at 90%.
Issue Price:
The final price at which shares are allocated to investors after the book building process, varying for different investor categories.
Oversubscribed:
When investors bid for more shares than the company offers in an IPO.
Underwriter:
An investment bank that assists the company in managing the IPO, setting the offer price, marketing, and distributing shares, earning an underwriting fee.
These terms help investors understand the process and details associated with participating in an IPO.
Naren is a finance graduate who is passionate about cryptocurrency and blockchain technology. He demonstrates his expertise in these subjects by writing for cryptoetf.in. Thanks to his finance background, he is able to write effectively about cryptocurrency.